Aug 13, 2020

Not His Business

Trump’s efforts to force the sale of TikTok erode the rule of law and hurt American competitiveness
Matthew D. Mitchell Senior Research Fellow , Tad DeHaven Staff Writer

President Trump delights in chiding the left wing of the Democratic party for its embrace of socialism. And rightly so. As a matter of both economic theory and real-world experience, those who live in freer economies enjoy more widespread prosperity and all that that entails (longer life spans, better education, and better opportunities for society’s most vulnerable individuals).

It’s strange, then, that the president has such a distorted view of free-market capitalism. By his lights, it is perfectly legitimate—and apparently consistent with the free-market philosophy that his party claims to embrace—for the president of the United States to dictate which businesses may operate where, with whom, and under what circumstances. Moreover, since he often holds the key to their survival, he can extract valuable concessions from them for the privilege of . . . existing.   

His latest target is TikTok. The wildly popular social media app specializes in short-form videos. Propelled by lip-syncing teenagers and viral dance-offs, it has garnered over 2 billion worldwide downloads, nearly 200 million of which have been in the United States. At the moment, it is owned by the Chinese tech firm ByteDance. Like every other social media platform, TikTok collects user data. But given its Chinese provenance, some are concerned that the app poses a threat to national security. That threat is likely overblown. But even if the concern were legitimate, the president’s response to it is not.

If the app wants to continue operating in the United States, President Trump has demanded that it must be sold to an American company. More controversially, he says that when it is sold, “A very big proportion of that price would have to go to the Treasury of the United States.” After all, the President asserted, “We have all the cards because, without us, you can’t come into the United States.”

The president calls it “key money,” which is a dated term for under-the-table (and often illegal) payments made to secure a real estate transaction. There’s another word that could be used to describe Trump’s demand: extortion.

The plain language of the Constitution suggests that he lacks the authority to follow through on his threat (Congress has the power of the purse, and a tax on only one firm is illegal). But the mere fact that he thinks it’s acceptable for the president of the United States to conduct economic affairs this way is alarming. It’s also commonplace for Trump.

A Pattern

The pattern was set early. In late 2016, the president-elect and vice-president-elect (then the governor of Indiana) used a combination of carrots and sticks to get United Technologies to shelve plans to relocate a Carrier plant from Indiana to Mexico. Pence offered the carrots: $7 million in Indiana taxpayer money. Trump waved the stick, asserting, “Companies are not going to leave the United States any more without consequences. Not going to happen.” Carrier conceded to the demands, though it would later move hundreds of jobs overseas anyway.

It would get worse.

In 2018, Harley Davidson was reeling from European trade tariffs, imposed in retaliation for Trump’s trade wars. The company considered moving some operations out of the country. Trump promptly attacked it on Twitter, warning that “they will be taxed like never before!” Ultimately, the motorcycle maker relocated jobs anyway.

Later that year, General Motors announced plans to halt production and lay off employees at several facilities in the United States and Canada. The economics just weren’t working. In response, Trump threatened to cut off GM’s federal subsidies. “You’re playing around with the wrong person,” he told GM Chief Executive Mary Barra. Trump attempted to bully GM into shuttering its operations in China and instead build a new (and unneeded) plant in Ohio. “They better damn well open a new plant there very quickly,” threatened the president.

The president has also threatened companies that in his view treat him “unfairly.” He believes, for example, that social media companies “totally silence conservative voices” (he said this on a free social media platform from which he has benefited mightily). Because of this, the ostensibly conservative president warned, “We will strongly regulate, or close them down.”

More recently, Attorney General William Barr has taken control of antitrust issues from the Justice Department’s Antitrust Division. It is a move that suggests this controversial policy area is likely to get further politicized.

The president has no love for the press, and few organizations have attracted his ire like the Washington Post. This, in turn, has placed Amazon firmly in his crosshairs because Amazon’s CEO, Jeff Bezos, owns the paper. In one instance, Trump demanded that the US Postal Service raise the rates it charges Amazon by “four or five times” in exchange for a loan from the Treasury. In another, the Pentagon surprisingly awarded a $10 billion cloud computing contract to Microsoft instead of Amazon after Trump allegedly intervened. It’s worth noting that unlike other tech firms, Microsoft has been able to avoid Trump’s wrath to its benefit. The message is clear: bend the knee, or else.

So what? The president was elected with a mandate to shake things up. Why should we care if his sharp elbows offend the sensitivities of corporate America? And besides, haven’t his interventions encouraged firms to keep more jobs and economic activity here at home?

Eroding the Rule of Law

In truth, the president’s personal interventions in particular firms and his habit of alternately threatening punishment or promising privilege depreciate the greatest asset of the American economy: the rule of law. 

Ours, John Adams asserted, was to be a government of laws and not of men. This simple assertion has long been an aspiration of American governance, even when we have failed to live up to it. Under a government of laws, rules are general, prospective, and universal. General rules apply in a wide variety of circumstances; they are not tailor-made for individuals or firms with specific characteristics. Prospective rules only apply to future acts; this means that one cannot be punished for past actions that were thought to be legal at the time. And universal rules apply equally to all; there are no special exceptions for one person or one firm.

The rule of law is rightly regarded as a necessary condition for liberty to take hold. Without it, liberty is only as secure as government officials permit it to be. We teach our children that Adams represented the British soldiers who stood trial for the Boston Massacre because we want them to remember that the rule of law applies equally to all and that even the unpopular deserve a presumption of liberty.  

Though we don’t say it as often, we should also remember that the rule of law is a necessary condition for economic prosperity. Without it, persons, their property, and their agreements with one another are only as secure as government officials permit them to be. Under the rule of law, consumers and entrepreneurs can pursue deals, take risks, and form partnerships, confident that their private arrangements will not be upended by some arbitrary government diktat. When the rule of law reigns supreme we can all make plans today, confident that the business models we rely on will not be made illegal tomorrow. 

We can see the economic consequences of the rule of law by observing the effects of its greatest violation. Slavery and Jim Crow ensured that the Declaration’s promise and the Constitution’s protections did not apply to Black Americans. In the breach of this “sacred obligation,” millions were robbed of not only their freedom and dignity, but also their ability to engage in peaceful, enriching commerce. Martin Luther King was right to call it a bad check. And its insufficient funds drained economic vitality from these communities for centuries.

Is the President’s Strategy Worth It?

And what of the saved jobs? Might they, at least, contribute to the American economy? In a word, no. There are at least five reasons that this is the case.

First, if a firm is either bullied or incentivized into making a decision that it would not otherwise make, then chances are, the decision was not an economically sustainable one to being with. You cannot negotiate with reality, no matter how skilled you are at the art of the deal. And if low-skilled labor is cheaper in other countries, then it’s better for US workers to train for higher-skilled jobs. 

Second, when selective subsidies are on the table, firms expend real resources seeking and maintaining these privileges, a costly phenomenon known as rent-seeking. The resources spent on seeking these subsidies could have been spent on productive endeavors such as R&D and customer service. Net of these efforts, many privileged firms actually earn a normal rate of return. In other words, subsidies don’t actually seem to enhance a firm’s bottom line over the long run.   

Third, threatened firms expend real resources fending off government threats. This phenomenon, which in some ways is the mirror opposite of rent-seeking, is known as rent extraction. It, too, is costly, for the same reasons. 

Fourth, one firm’s privileges tend to encourage its competitors to seek their own favors, whittling away whatever extra profit the subsidy initially conferred on the privileged firm.

Fifth, government protections tend to make firms lazy and inattentive to costs or consumer desires, a phenomenon known as x-inefficiency.

What Is at Stake?

President Trump is no longer a businessman. As the executive of the federal government, he cannot—and certainly should not—direct economic resources in the manner of those socialist planners he claims to oppose. 

With every attempt to pick winners and losers in the marketplace, he erodes the rule of law, displaces the sovereignty of the consumer, and amplifies the power and scope of the federal government. Worse yet, it won’t work.  

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